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CPO, crude oil decoupled, but not for long, says LMC chief

KUALA LUMPUR: The weaker demand for crude palm oil (CPO) amid the global economic crisis has decoupled the commodity from crude oil, but that would not last for long, said chairman of LMC International Dr James Fry.

"Vegetable oil prices will only be decoupled from the oil price for a short period, but it is not sustainable. The prices of the two commodities will be coupled again in the future when the market corrects," he added.

Recent news reports suggested that the current price movements' pattern in CPO futures and crude oil was an indication that the two commodities were decoupling.

Speaking to reporters on the sidelines of a palm and lauric oils conference here yesterday, he said the CPO sector outlook was bleak as the world had been in the worst recession for a long time.

"The outlook and vegetable oil demand is expected to remain weak in the next six months. The demand globally is almost flat and the only demand will come from the biofuel sector, but Malaysia needs to take time to create a new biodiesel system for use," he said.

Fry said when vegetable oil prices went too high against crude oil, then biofuel prices would become uncompetitive in many countries.

Yesterday, CPO three-month futures dropped RM4 to RM1,950 per tonne.

Meanwhile, in an interview, Reuters quoted Fry as saying that Malaysian crude palm oil prices would probably drop at least 10% in the next six months as a worsening global recession reduced food and fuel consumption.

"If crude oil stays at these kinds of levels, just below US$45 (RM166.50), I would see a fall of over 10%," Fry told Reuters. "If crude oil goes down, then the price will fall more."

Fry's comments are in line with trade estimates, which expect prices to fall because of a slowdown from top importers China and India after heavy stockbuilding, a seasonal supply spurt and a rebound in producer inventories that fell to their lowest since 2007.

"You have some countries like India which are still okay, but in the industrial world, the US, Europe and Japan, I think food demand is going see an insignificant change, may be down so all the growth has to come from biofuels," said Fry.

"And people are saying that biodiesel production in the US will be half of last year because of the anti-dumping duties in Europe. To me that sounds pretty bearish if you lose a big chunk of non-food demand."